Flexible and tax-efficient – Why SIPPs can be a great choice for intergenerational planning
March is typically a busy month for us at IPM. Like many in financial services, there is nothing like the looming end of tax year to focus people’s minds. 2021 was no exception; in fact, we were pleased to have recorded our best month for new SIPPs in several years.
A conversation I had with a financial adviser during this period stuck with me.
“One of the reasons we are looking at pensions so positively these days is because of the flexibility of how benefits can be paid when a client dies.”
Since 2015 the rules regarding death benefits within pensions have changed, something we’ve covered in more detail on our blog. However, I had not appreciated the impact the death benefit rules may now have on a client’s thinking when it comes to funding a SIPP.
Far from pensions being seen as inaccessible, these rules, coupled with Pension Freedoms (the removal of the old, capped drawdown limits), have now put pensions in a more favourable light. They are a vehicle within which wealth can be accumulated, accessed flexibly, and passed on favourably to future generations.
No need for SIPP benefits to be withdrawn when a client dies
The two key points from the 2015 rule changes were:
- If a client were to die before the age of 75, the benefits in a SIPP can be paid out to nominated beneficiaries without any tax due.
- If a client were to die after the age of 75, the benefits in a SIPP can be paid out to nominated beneficiaries at their marginal tax rate.
Of course, a client’s death triggers a benefit crystallisation event. Therefore, if the client’s total benefits exceed the Lifetime Allowance (you’ll recall we discussed the impact of the Lifetime Allowance freeze recently) and they did not take out any form of protection from this, a tax charge will apply.
However, there is now no need for benefits to be withdrawn at all once a client has died. Instead, the beneficiary has the option to leave the benefits in a SIPP in their own name and choose to withdraw them at any time they wish.
The death benefit rules for SIPPs may be more straightforward than they ever have been. However, there are still some areas of financial planning to consider here.
As well as other tax wrappers, SIPPs are increasingly seen as a way of passing wealth down the generations, helping advisers engage with the children and grandchildren of their clients.
Death before the age of 75
Even if the beneficiary leaves benefits within the SIPP to withdraw at a later date, for a death before the age of 75 there will still be no tax to pay.
While it may be tempting for a beneficiary to get their hands on a tax-free lump sum, would it be better to leave any benefits that are not immediately required in a tax-efficient vehicle like a SIPP?
Investments can remain within the SIPP, continuing to grow in value, while allowing the beneficiary to flexibly access the benefits as and when required.
Then, upon the death of the beneficiary, they can pass this on to their nominated beneficiaries with the same favourable tax treatment, as opposed to forming part of their estate for IHT purposes if they had withdrawn the benefits as a lump sum.
Death after the age of 75
For death after the age of 75, tax will still be due regardless of when the benefits are withdrawn.
However, the impact from a tax perspective is something that can be managed with careful planning. Rather than taking bigger lump sums, which could result in a higher tax bill, smaller withdrawals over a longer period of time could result in less tax being paid by the beneficiary.
Beneficiaries don’t have to take SIPP benefits straight away on death
If the decision is made to not take the benefits straightaway upon a client’s death, any assets in the deceased’s SIPP can be passed to SIPPs in their beneficiary’s name.
For example, if the monies are managed by a DFM and the client nominated two beneficiaries to receive a 50/50 split, IPM would establish a SIPP for each beneficiary along with an account with that DFM. We’d then arrange for an equal split of the deceased’s assets to be paid into the new SIPPs.
Our second article this month looks at a more complex scenario that involves the death of a client with commercial property involved.
A good conversation topic when reviewing your clients’ pensions
As well as enabling your clients to plan flexibly for the future, the death benefit rules as they stand lend themselves to being a good conversation piece with your clients when reviewing their pensions.
In particular, how many of your clients have updated their nomination to their pension provider since the rule changes in 2015?
It is not uncommon for people to nominate their spouse as their sole beneficiary. However, it is always worth clients adding anyone else they would like the trustee to consider paying benefits to, especially children who may now be grown up, or any grandchildren.
Take a scenario where a spouse is nominated as the main beneficiary and the children or grandchildren are also nominated, but to receive a lesser amount. Here the spouse can forego their entitlement to the death benefits, and these can be passed onto any other nominated beneficiaries.
However, this cannot be done unless the original SIPP member elects for their benefits to be paid as income and they are named on the “nomination of beneficiaries” form.
This means that any nomination made prior to 2015 probably needs revisiting.
Get in touch
If you want to have a chat about the potential of SIPPs for your clients, or any other aspects of pension planning, please contact us. Email info@ipm-pensions.co.uk or call 01438 747 151.